You won’t necessarily lose your home in Chapter 7 bankruptcy, especially if you don’t have much home equity and your mortgage is current. But it can happen. Whether you’ll lose your home after filing for Chapter 7 bankruptcy will depend on the following factors:
- whether your mortgage is current
- if you can continue making the payments after bankruptcy
- the amount of your home equity, and
- whether your state’s homestead exemption will protect all of the equity.
If you’re behind on your payment, in foreclosure, or can’t exempt all of your home equity, you’ll have a better chance of keeping your home using Chapter 13 bankruptcy. Filers faced with those circumstances should learn more about choosing between Chapter 7 or Chapter 13 when keeping a home.
Your Home and the Chapter 7 Bankruptcy Trustee
Chapters 7 and 13 work very differently, so it’s essential to understand what you must do to keep valuable property in Chapter 7. Here’s how it works.
After filing for Chapter 7, your property will go into a bankruptcy estate held by the Chapter 7 bankruptcy trustee appointed to your case. The trustee will sell property in the estate for the benefit of creditors.
However, you don’t lose everything you own.
You can “exempt” or remove property from the estate your state determined is reasonably necessary to maintain a home and employment. You’ll find out what you can keep by reviewing your state’s bankruptcy exemptions.
Here’s the tricky part—if you make a mistake, it’s unlikely that the bankruptcy judge will allow you to dismiss the case, and you could lose the house. So you must follow the rules carefully.
Are Your House Payments Current?
The automatic stay will temporarily stop a foreclosure when you file for Chapter 7. But if you’re behind on the mortgage payment when you file, the best you can hope for is delaying the process for a few months.
- Why filing won’t cure a default. Chapter 7 bankruptcy doesn’t provide a way for you to catch up on the overdue payments. This presents a problem because a mortgage is a secured debt, and Chapter 7 doesn’t erase the lien that gives the lender the right to take back the home if you don’t pay. The lender can foreclose after the automatic stay lifts, and you’ll lose the house.
- What will happen if you file. The lender can ask the court to lift the automatic stay to allow foreclosure proceedings to continue, which the court will likely grant if the trustee doesn’t plan to sell the home. Or, the lender can wait until the bankruptcy ends, proceed with foreclosure, and sell the house at auction.
- Chapter 13 bankruptcy can help. If you’re behind and want to keep your home, the better option is to file a Chapter 13 case. Unlike a Chapter 7 bankruptcy, Chapter 13’s repayment plan provides a way for you to catch up on mortgage arrearages. Also, if you have more equity than you can protect with a homestead exemption (more below), you can prevent a home loss by paying your creditors the value of the nonexempt equity through the plan.
Can You Continue Making House Payments After Chapter 7 Bankruptcy?
It’s also essential to be sure you can afford to continue paying the mortgage after a Chapter 7, because losing the house after your case might put you in a worse financial position. Why? If the lender couldn’t sell the home for the amount you owe, you’d be stuck with a deficiency balance depending on the laws of your state.
Worse yet? You’d have to wait eight years to file a second Chapter 7 bankruptcy, leaving the lender plenty of time to collect a deficiency balance using collection methods such as garnishing your wages or levying on a bank account.
How Much Equity Is in Your Home?
If your mortgage payment is up-to-date, your next step will be determining how much equity exists. You’ll start by valuing your home.
Next, subtract any outstanding mortgage balance from the home value to get your “equity.” The equity is the amount you’d have in your pocket after selling the house and paying the mortgage.
If you don’t have any equity, you’re in good shape. Trustees don’t sell houses without equity. Otherwise, you’ll need to be able to protect your equity with a bankruptcy exemption to avoid losing the home in Chapter 7 bankruptcy.
Learn more about filing for bankruptcy if you have equity in your home.
Can You Protect Your Home Equity With Bankruptcy Exemptions?
State exemption statutes list the property its residents can protect in bankruptcy. Some states allow residents to choose between the state exemption list or the federal bankruptcy exemption scheme. Either way, almost all states allow residents to protect some home equity with a homestead exemption. You might be able to exempt even more with a wildcard exemption.
If your exemptions adequately cover your equity, the trustee won’t sell your home in a Chapter 7 bankruptcy. However, if your exemptions protect only a portion of it, the trustee will sell the house, pay off the mortgage, give you the amount you’re entitled to exempt, and use the remainder of the sales proceeds to pay creditors.
Although you can’t figure costs into your equity determination, the trustee will consider costs before selling the home. If, after deducting sales costs, the amount remaining isn’t enough to make a meaningful payment to creditors, the trustee will abandon the property, and you’ll get to keep it.